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  3. American Economic Journal: Applied Economics
  4. January 2020
  5. Race to the Bottom? Local Tax Break Competition and Business Location

Race to the Bottom? Local Tax Break Competition and Business Location

  • Evan Mast
American Economic Journal: Applied Economics
vol. 12, no. 1, January 2020
(pp. 288-317)
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Abstract

I analyze how competition between localities affects tax breaks and business location decisions. I first use a geographic instrument to show that spatial competition substantially increases firm-specific property tax breaks. I then use this pattern to estimate a model of localities competing for mobile firms by offering tax exemptions. Incounterfactual exercises, restricting which levels of government can offer tax breaks has little effect on equilibrium business locations but lowers total exemptions by 30 percent. This suggests that local tax break competition primarily reduces taxes for mobile firms and is unlikely to substantially affect the efficiency of business location.

Citation

Mast, Evan. 2020. "Race to the Bottom? Local Tax Break Competition and Business Location." American Economic Journal: Applied Economics, 12 (1): 288-317. DOI: 10.1257/app.20170511

Additional Materials

JEL Classification

  • H25 Business Taxes and Subsidies including sales and value-added (VAT)
  • H71 State and Local Taxation, Subsidies, and Revenue
  • H73 State and Local Government; Intergovernmental Relations: Interjurisdictional Differentials and Their Effects
  • R32 Other Spatial Production and Pricing Analysis
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